George K. Tanham, born in 1922 at Englewood, U.S.A., earned his BA & MA degrees from Princeton and Stanford Universities in 1943 and 1947, respectively, and received his Ph.D. in 1951.

Mr. Tanham served in the U.S. Army during World War II, rose to Captain, Field Artillery, and was awarded the Silver Star with Oak Leaf Cluster, Air Medal, Purple Heart and the usual campaign medals. He was Associate Professor of History and Master of Student Houses in California Institute of Technology, 1947-55; Associate Director, USOM, Vietnam, Department of State, Agency for International Development, 1964-65; Special Assistant for Counterinsurgency (Personal rank of Minister), U.S. Embassy, Bangkok, Thailand, 1968-70; Vice-President, Project Air Force Division, 1971-75; Corporate Vice-President and Trustee, 1970-82 and since 1984 Resident Consultant, The RAND Corporation.

He has authored about a dozen books and numerous RAND publications on Islam in SEA, Counterinsurgency, Souh Pacific Islands and India in addition to numerous articles in various journals. He was Editor,
Conflict: An International Journal, New York from 1978 to 1991 and since 1992 is Editor,
Studies in Conflict & Terrorism, New York, USA.

Few
financial endeavours
have occupied the time of more men over
more years with less success than
attempting to ?beat the market?. So many
have tried and failed that it has
become popular to believe that no one
can consistently outperform the averages.

Nothing could be further
from the truth! Some (equity) investors,
utilizing more sophisticated
approaches than the public at large, can
earn much higher returns, year in and
year out,? says the author of this
article. And such higher returns from
stocks
can lead to ?riches beyond the dreams of
avarice?. Read on to find out how?

The
endless
quest by fundamentalists and technicians
alike to discover the secret of
calling market turns is driven by a
knowledge of the incredible returns a
completely successful timing strategy
would yield.

Consider, for
example, that from early 1964 through
the end of 1984, the average New York
Stock Exchange common stock provided its
holders with a total return from
dividends and capital appreciation of
11% per annum compounded. By comparison,
an investor with the intelligence and
foresight to step out of stocks and hold
cash during the three bear markets of
the period could have earned nearly
twice
that return ? 21% per annum compounded.
He could have achieved such a
performance without ever picking a
single stock or speculating on margin;
by
merely buying and selling ?the market?
(which is easier than you might think).

Taking
the
illustration a step further, an investor
who actually sold the market short
during the three bear moves (instead of
just holding cash) would have reaped an
additional profit sufficient to increase
the compounded return to 27% per
annum, a stunning cumulative return of
13,812% (see Table 1).

But let us
take our illustration yet a further
step. An investor who perfectly forecast
every up and down market swing of at
least 5% during those years, buying just
before each up move and selling short
just before the market was about to drop
5% or more, would have garnered a
return approaching an astounding 52.4
million percent, equivalent to nearly
doubling his money every year!

Perfectly
forecasting even small price swings
would naturally lead to even larger
profits, although ultimately (broker)
commission costs would equal the size of
the swing itself and eat up all gains.

So the
next
time you hear someone say that all you
need to do is buy good stocks and hold
them, think of these comparisons of "buy
and hold" with various
market timing strategies.

Of
course,
few investors ever time a single market
cycle to perfection, much less repeat
the feat year in and year out.? And
accurately timing all market moves as
small as 5% is simply impossible.
Indeed,
the incredible returns of the short term
trading strategies shown in Table 2
demonstrate how improbable such perfect
timing is. Thus, the endless quest for
new market timing techniques is based
less on a belief that perfection is
achievable than on an understanding of
how profitable even the slightest
success in market timing can be.

Even
readily
attainable levels of market timing
success can have a dramatic impact on
overall returns. For example, an
investor who was short for only one-
quarter of
each of those three bear markets in the
past twenty years would have spared
himself half the losses incurred by his
fully invested counterparts, and his $
10,000 would have grown to $237,790 ?
tripling the profits of buy and hold.

Just
what
magnitude of returns constitutes a
realistic expectation is a function of
the
degree of forecasting accuracy that can,
in practice, be achieved.? It
might seem likely that accurate market
forecasts for the next few days would be
relatively easy to achieve, and that
any prediction of prices six months or a
year in the future would be highly
conjectural. Interestingly enough,
exactly the opposite is true; long-term
market cycles are much easier to
anticipate than day-to-day wiggles in
the averages.
Furthermore, besides being exceedingly
difficult to predict, small, brief price
movements are rendered even less
profitable by the burden of repeated
transactions costs.

Be it
from
impatience or curiosity, most investors
are unduly concerned about what the
market will do in the next few days when
their attention would far better be
focused on where the market will be in
three, six, or twelve months. The
answers to questions about tomorrow's
ripple may be more interesting, but
answers to questions about the major
trend are ultimately far more
profitable.

Not
surprisingly, many of the academic
studies that have concluded that
successive
stock price changes are random
(unrelated to one another), have
analyzed only
very short term market movements, which
do exhibit a large random
component.? However, when the longer
term, which has been all but ignored by
random walk theorists, is viewed in the
light of market forecasting indicators,
it becomes clear that the market does
not follow a random pattern, and that
superior profits await equity investors
willing to follow the guidance of those
indicators.
.